In this week’s article, I am going to walk you through 3 Economic schools of thought, namely, Laissez-Faire Economics, Neoclassical Economics and Keynesian Economics. So, let’s jump right to it!
What is Laissez–faire Economics?
According to the “Laissez-faire” economic school of thought, the economy works best when the government does not intervene in the markets and just “leaves it alone”. It further asserts that the most efficient allocation of resources takes place by the natural forces of supply and demand in free-markets.
Laissez-faire is French for “leave us alone.”
What are it’s key tenets?
Thereby, the core tenets of “Laissez Faire” are: (i) Capitalism (ii) Free-Markets and (iii) Rational Market Theory.
To expatiate, if capitalism is allowed to run it’s course in a free-market economy (without any barriers or intervention for conducting business), then the market correctly prices goods and services by the virtue of supply and demand. The underlying assumption is that, all the participants in the market are rational beings, who have access to perfect information and thereby come to inferences logically rather than being emotionally-biased.
What is Neo-Classical Economics?
The neoclassical economic school of thought purports the fact that the most pivotal factor in determining the value of any product is the utility (aka level of satisfaction and contentment) it provides to the consumers (assuming that the consumers are rational folks, driven by logic and not by emotional whims). This differs from the perspective of classical economics, which surmises that the value of a product is determined solely by the costs indulged in for it’s production. Some of the economists who inspired this school of thought are William Stanley Jevons, Carl Menger, Maria Edgeworth and Léon Walras.
Let’s consider a particular product, say a jar of Nutella, hypothetically costs 50 bucks to produce and the labor cost is another additional 100 bucks. So classical economists would say: “Hey! Please get me a jar of Nutella, here’s 150 bucks.” But what a Neo-Classical economist would suggest is, the price of a product is derived from the value/satisfaction it provides to the customer (and in this case, I’d say we’d all be very satisfied after gorging on Nutella) and not just the cost it takes to produce the product. Thereby, according to Neo-Classical economics, the price of a product is above and beyond just the production costs! (I think that’s pretty reasonable, yeah?)
What are it’s key tenets?
- Utility Maximisation
- Market Equilibrium.
The Keynesian Economic School of thought is derived from the notions the political economist Sir John Maynard Keynes held. He believed that the government has access to the “levers” to catapult the economy into the right direction. He purported the fact that, neither communism nor full-blown blown free-market theories would be able to solve the ills and drawbacks of capitalism.
Now, in a future post I will delve deeper into the concepts of Capitalism, Free Markets, Liberalism, Communism and all that jazz, which would help appreciate these different schools of economic thought even better. But for now, let’s look at some of the seminal ideas put forth by the man Keynes himself:
That’s it for this week 🙂
Coffee Time Finance.